HC Flags “Catch-22” in TDS Prosecution; Directs Liquidator to Act, Grants Limited Protection

Balaji Bhat Vs CIT (Appeals) -V (Karnataka High Court)

HC Flags “Catch-22” in TDS Prosecution; Directs Liquidator to Act, Grants Limited Protection

This case before the Karnataka High Court concerns prosecution of a former Managing Director (MD) for failure to remit Tax Deducted at Source (TDS) by a company that was subsequently wound up.

The petitioner, former MD of M/s Primus Retail Pvt. Ltd., challenged criminal proceedings initiated u/s 276B & 278B of the Income Tax Act for non-payment of TDS. The company, engaged in retail business, had deducted TDS on rent and salaries during FY 2009–10 and 2010–11 but failed to remit the same due to financial difficulties. A survey by the department led to proceedings u/s 201(1)/(1A), raising substantial TDS demands.

A critical aspect of the case was that the TDS liability was allegedly inflated due to a bona fide clerical error in TDS returns (April–June 2010 quarter), where the amount was wrongly reported at an abnormally high figure. Based on this erroneous data, assessment orders were passed raising significant demand.

Subsequently, the company was wound up (2012) and an Official Liquidator took charge. The petitioner claimed that:

• The error in TDS returns required correction and challenge before appellate authorities.
• The responsibility to pursue appeals shifted to the Official Liquidator.
• Despite repeated representations, the Official Liquidator failed to act.
• The petitioner, though no longer in control, was exposed to criminal prosecution.

The petitioner attempted to pursue appellate remedies:

• Appeal before CIT(A) was dismissed for non-prosecution.
• Appeal before ITAT was rejected on the ground that the petitioner (as former MD) had no locus standi post-liquidation.

This created a “catch-22” situation:

• The petitioner could not pursue appeals (no locus after liquidation),
• Yet was being prosecuted personally for TDS default.

Court’s Key Observations:

1. Responsibility for TDS liability: The Court held that liability for TDS default attaches to persons in charge of the company during the relevant financial year. Hence, the petitioner cannot escape proceedings merely due to subsequent liquidation.

2. Failure to correct error timely: Even if the TDS figure was wrongly reported, steps should have been taken to revise returns or challenge assessment orders in time. This was not done before liquidation.

3. Appellate remedy still available: The Court clarified that the petitioner’s proper remedy lies in filing an appeal under Section 260A against Tribunal orders, and writ jurisdiction cannot substitute this statutory remedy.

4. Role of Official Liquidator: The Court acknowledged that once liquidation occurs, the Official Liquidator assumes control and ought to have examined and pursued correction of erroneous tax demands, especially when representations were made.

5. Recognition of procedural injustice

The Court expressly noted the unusual hardship:

• No locus before Tribunal
• Yet facing prosecution
  This imbalance justified limited intervention.

Final Directions:

• The writ petition was partly allowed.
• The Official Liquidator was directed to:
  • Consider the petitioner’s representation dated 20.09.2018, and
  • Take appropriate steps, including possible appellate action, within 2 months.
• The petitioner was given liberty to file an appeal under Section 260A.
• Interim protection: No coercive action against the petitioner until the representation is considered.
• However, if no appeal is filed within the stipulated time, criminal proceedings will continue.

The judgment reinforces that TDS liability attaches to persons in charge at the relevant time, but also recognizes procedural gaps in liquidation scenarios, ensuring that assessees are not trapped in a situation where they cannot defend themselves yet face prosecution.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner has sought for the following reliefs:

i. Quash the proceedings in C.C No.29/2015 pending on the file of Special Court for Economic Offences, Bengaluru (Annexure – K) in so far as the Petitioner is concerned, by issuing the Writ of Certiorari or any other writ or an order in the nature of writ.

ii. Direct the 3^rd Respondent to act on the representation dated 20.09.2018 (Annexure – S) made by the Petitioner by issuing a Writ of Mandamus or any other writ or an order in the nature of writ.

iii. Direct the Respondent No.2 to reassess the Respondent No.3 Company for the Financial year 2010-11, as envisaged under the Income Tax Act, by issuing a writ of Mandamus.”

2. The petitioner claims that he was the former Managing Director of the respondent No.3, which is a Company incorporated under the Companies Act, 1956, and was engaged in the business of sale of ready-made garments. He contends that respondent No.3 was an assessee under the Income Tax Act, 1961 (for short, ‘the I.T Act’) and used to deduct tax at source. The respondent No.3 was in possession of various immovable properties on lease on a monthly basis. These properties were used for retail sales by the respondent No.3 and it used to pay monthly rent after deducting the tax at source. It also used to pay monthly salary to several of its employees after deducting TDS. During the Financial years 2009-10 and 2010-11, the respondent No.3 suffered financial constraints which resulted in non-payment of monthly rent in respect of the retail stores and salaries to its employees. The Tax Deducted at Source (TDS) on the payment stood accrued for the purposes of income tax which, however was not remitted by the respondent No.3. On 01.07.2011, the respondent No.2 visited the premises of respondent No.3 and conducted a survey and reviewed all financial documents. It is further stated that based on the survey, a notice dated 09.02.2012 was issued by the respondent No.2 to the respondent No.3 to show cause as to why it should not be treated as an assessee in default under Section 201 (1) of the I.T Act for non-remittance of Rs.3,75,91,248/-. The Accounts Officer of the respondent No.3 prepared various statements and returns under the I.T Act including the TDS. The petitioner contends that the approximate TDS in respect of the lease rentals payable by the respondent No.3 was in the range of Rs.10,00,000/- to Rs.15,00,000/- per quarter. However, while preparing the statement of TDS for the quarter April to June 2010, the Accounts Officer inadvertently and erroneously arrived at an amount of Rs.1,22,79,579/ as the TDS amount for the said quarter. The petitioner contends that this was a bona fide error and was not noticed by any one and due to this mistake, the total TDS liability for the said quarter rose to Rs.2,84,81,060/-. The petitioner contends that he is not able to precisely state the liability as all the books of accounts of respondent No.3 are with the Official Liquidator.

3. Based on the said erroneous statement, the respondent No.2 passed an order dated 22.02.2012 under Section 201(1) and 201(1A) of the I.T Act demanding the respondent No.3 to pay Rs.3,12,11,026/- for the financial years 2009-10 and 2010-11. For the financial year 2011-12 up to 31.12.2011, the respondent No.2 passed a separate order demanding payment of Rs.49,12,997/- from the respondent No.3. The petitioner claims that pursuant to the said assessment orders dated 22.02.2012 passed by the respondent No.2, respondent No.3 partially discharged the tax liability and paid a sum of Rs.50,50,000/-. The respondent No.2 then issued a Corrigendum dated 23.04.2013 in respect of the earlier order dated 02.04.2013 directing the respondent No.3 to pay Rs.1,89,22,102/- and Rs.39,81,141/- along with interest quantified at Rs.3,81,254/-.

4. In the meanwhile, respondent No.3 was wound up as per an order dated 08.10.2012 passed by this Court in Company Petition No.30/2012 connected with Company Petition Nos.1/2012 and 181/2011. The petitioner contends that an Official Liquidator took over the management, affairs and assets and liabilities of the respondent No.3 – Company. He contends that he visited the office of the Official Liquidator and brought to his notice that there was an error in reporting the TDS amount for the quarter April to June 2010 and that the respondent No.2 had passed assessment orders based on such error and that it was necessary to challenge the said orders before the Appellate Authority. He contends that despite his earnest request, the Official Liquidator did not take any steps. The petitioner being the former Managing Director of the respondent No.3 apprehending punitive consequences, challenged the assessment orders in an appeal in ITA No.339/TDS/CIT(A)-V/2012-13 before the respondent No.1/Appellate Authority. Even after the appeal was filed, the petitioner pursued the Official Liquidator to continue and prosecute the appeal. However, the Official Liquidator did not take any steps. Consequently, the appeal filed by the respondent No.3 was dismissed for non-prosecution in terms of an order dated 20.12.2013 passed by the respondent No.1.

5. The respondent No.4 then filed a complaint in C.C. No.29/2015 under Section 200 of the Code of Criminal Procedure, 1973 (for short, ‘Cr.P.C’) before the Special Court for Economic Offences, Bengaluru (for brevity, ‘the Special Court’), against the petitioner and respondent No.3 for the offence punishable under Section 276B read with Section 278B of the I.T. Act due to non-payment of tax liability. In the said proceedings, the petitioner was shown to be representing the respondent No.3 – Company as its Managing Director although the respondent No.4 knew that the Company was wound up and the Official Liquidator was in-charge of the same. The petitioner was released on bail and in the said C.C. No.29/2015, he filed an application for discharge under Section 245 of the Cr.P.C. The respondent No.4 objected to the said application, which was rejected by the Special Court in terms of an order dated 04.10.2019.

6. The petitioner contends that for no fault of his, he is forced to face a criminal prosecution though it is Official Liquidator, who must have been proceeded against. He contends that the orders of assessment passed by the respondent No.2 had to be challenged by the Official Liquidator but he showed no interest to challenge the same. The petitioner was thus left in a grid lock and was constrained to file an appeal in ITA No.1216/Bang/2018 before the Income Tax Appellate Tribunal, ‘A’ Bench, Bengaluru, (for short, ‘the Tribunal’) challenging the order dated 20.12.2013 passed by respondent No.1 dismissing the appeal filed by the respondent No.3 for non-prosecution. The Tribunal in terms of the order dated 05.09.2018 after hearing the petitioner herein, dismissed the appeal in limine on the ground that the petitioner being a former Director of the respondent No.3 – Company had become functus officio and had no locus standi to file the appeal in the light of the fact that the respondent No.3 – Company was ordered to be wound up in terms of the order passed by this Court dated 08.10.2012 in Co.P No.30/2012 and connected cases and an Official Liquidator being appointed by the said order to take over possession of documents and records of the Company. The petitioner then again addressed a letter dated 20.09.2018 and requested the Official Liquidator to challenge the assessment orders passed by the respondent No.2. However, the Official Liquidator did not show any inclination to challenge the orders of assessment. The petitioner is, therefore, before this Court seeking the aforementioned reliefs.

7. Learned Senior Counsel for the petitioner submitted that the assessment orders passed by the respondent No.2 were based on an erroneous declaration and therefore, the same had to be challenged by the Official Liquidator. He contends that soon after the assessment orders were passed, the respondent No.3 – Company was ordered to be wound up and the Official Liquidator took over the management of the Company. He, therefore, contends that it was the duty of the Official Liquidator to challenge the orders of assessment passed by the respondent No.2. He contends that the petitioner being the former Managing Director of the Company had no locus standi to challenge the orders of assessment passed by the respondent No.2 and despite the fervent appeals of the petitioner, the Official Liquidator showed no concern to challenge the orders of assessment. He contends that the petitioner is now exposed to an unwanted prosecution and hence, the petitioner is left remediless. He, therefore, prays that the prosecution of the petitioner in C.C No.29/2015 before the Special Court be quashed and a direction be issued to the Official Liquidator to act on the representation of the petitioner dated 20.09.2018 and take appropriate steps to challenge the orders of assessment passed by the respondent No.2 and to issue a direction to the respondent No.2 to reassess the respondent No.3 – Company for the financial year 2010-11 by taking note of the error committed in declaring the TDS for the quarter April to June 2010.

8. The learned counsel for the respondent Nos.1, 2 and 4 on the other hand contended that the petitioner having unsuccessfully availed the remedy of an appeal before the Appellate Authority and Tribunal, cannot assail the proceedings initiated against him for the offence punishable under Section 276B read with Section 278B of the I.T Act. He contends that the appropriate remedy for the petitioner was to challenge the order of the Tribunal before this Court under Section 260A of the I.T Act. He contends that the TDS amount has to be recovered as per the assessment orders of even date i.e. 22.02.2012 and therefore, the petitioner is bound to face the consequences. He contends that the TDS amount payable was for the financial year 2010-11 at which point of time, the respondent No.3 – Company was not wound up and therefore, it is the duty of the person responsible for the affairs of the respondent No.3 to pay the shortfall of the TDS as assessed by the respondent No.2.

9. I have considered the submissions of the learned Senior counsel for the petitioner and the learned counsel for the respondent Nos.1, 2 and 4 and the Official Liquidator for respondent No.3.

10. The petitioner admittedly was the Managing Director of the respondent No.3 – Company during the financial year 2010-11. The TDS return even if filed erroneously, steps must have been taken for filing a revised return within the time allowed and before the assessment orders were passed by the respondent No.2. However, that was not done till the respondent No.3 – Company was wound up. Since the liability to pay the shortfall of the TDS was upon the persons who were responsible for the affairs of the respondent No.3 – Company during the financial year 2010-11, the petitioner was entitled to challenge the orders of assessment passed by the respondent No.2 and establish that the assessment orders were based on an erroneous mistake committed by the Company while declaring the TDS. Therefore, the petitioner having availed the remedy of an appeal was bound to follow it up by challenging the same before this Court under Section 260A of the I.T Act. So long as an assessment order is in force, the Income Tax Department is entitled to initiate steps to recover the tax and penalty. However, the Official Liquidator on coming to know of the proceedings, must have taken steps to consider the request of the petitioner and not doing so, has resulted in a catch-22 situation for the petitioner in as much as his appeal before the Tribunal is dismissed in limine on the ground of want of locus standi and on the other, he is prosecuted under Sections 276B and 278B of the I.T Act. This Court is not authorized and empowered to unsettle or review the order passed by the Appellate Tribunal in proceedings under Article 226 of the Constitution of India and the only remedy available to the petitioner is to file an appeal before this Court as provided under Section 260A of the I.T Act. Hence, the following:

ORDER

(i) The petition is allowed in part.

(ii) The respondent No.3 is directed to consider the representation of the petitioner dated 20.09.2018 and take appropriate steps. This shall be complied within a period of two months from the date of receipt of a certified copy of this order. It is also open for the respondent No.3 to consider filing of an appeal against the order(s) passed by the Appellate Authority / respondent No.1 as well as the Income Tax Appellate Tribunal, ‘A’ Bench, Bengaluru, while considering the representation of the petitioner.

(iii) In so far as relief Nos. i and iii sought by the petitioner are concerned, it is open for him to file an appropriate appeal under Section 260A of the Income Tax Act, 1961 challenging the orders passed by the Appellate Authority as well as the Income Tax Appellate Tribunal.

(iv) All contentions of parties are left open.

(v) Till the respondent No.3 considers the representation of the petitioner, the respondent Nos.1 and 2 shall not take any precipitative action against the petitioner. It is made clear that if the petitioner does not file an appeal within two months from now, the proceedings in C.C. No.29/2015 before the Special Court for Economic Offences, Bengaluru shall continue.